Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 is a landmark case in British corporate law. The unanimous decision of the House of Lords meant that the doctrine of corporate personality as set out in the Companies Act 1862 was firmly maintained, so that creditors of an insolvent company could not sue the shareholders of the company for payment of outstanding debts. In some cases, the idea of a separate entity may be considered arbitrary, and courts may issue decisions rejecting the concept of a separate legal entity for a variety of reasons. In order to meet the person behind the veil and reveal the very heart of the company, the court also makes judgments against the idea of a separate legal entity. It is obvious to ask where this intention of the legislator is expressed in the legislation. Even if we were free to insert words to express that intention, I would have great difficulty determining what the exact intent is or has been attributed to Parliament in this way. In this particular case, it is the members of a family who represent all the shares; But if the alleged intention is not limited to a proposal so narrow that the seven shareholders cannot be members of a family, to what extent can willful influence, authority or majority acquisition be exercised among the shareholders in order to subject them to the alleged prohibition? It is, of course, easy to say that it contradicted the intention of the legislator – a proposition which he finds difficult to test because of its universality; But if we want to answer in the affirmative, which the legislator has prohibited, there is, it seems to me, an insurmountable difficulty for those who want to insert such a prohibition into the law by construction. The doctrine was first used in Salomon v. Salomon & Co. Ltd. In this case, Mr. Salomon formed a company under the Companies Act of 1862. He and his family joined the company`s board of directors.
The company`s shares, totalling 20007, were subscribed. Salomon subscribed to the 20001 shares, while his family subscribed to the remaining 7 shares. Salomon, the company`s secured creditor, was supposed to receive £10,000, but there was only £6,000. Because they were unsecured creditors, the surviving shareholders did not receive money. In court, the unsecured creditors argued that Mr. Salomon should not be paid first because he and the company were identical and Mr. Salomon`s company did not have a separate legal existence, so he could not claim the property since he was the director of the company. The incorporation of the company cannot be challenged (see section 18 of the Companies Act 1862). The question whether the Court could annul the instrument of incorporation by a procedure such as facial scire is a question which has never been examined and on which I do not rule, but in any event, in an action such as the present one, the validity of the certificate cannot be challenged. The company must therefore be regarded as a corporation, but as a corporation constituted for an illegitimate purpose.
Furthermore, since there have always been seven members, although six of them each hold only a share of £1, Mr Aron Salomon cannot be reached under Rule 48, to which I have already referred. Given that the corporation must be recognized as a corporation, it is difficult for me to say that the corporation did not carry on its business activities as principal and that debts and liabilities incurred on its behalf are unenforceable as a corporation. However, it does not follow that Justice Vaughan Williams` arrangement is erroneous. A person may carry on his activities as an entrepreneur and, as such, incur debts and obligations and always be entitled to compensation from the person for whose benefit he carries on the business. Justice Vaughan Williams held that the Society represented Aron Salomon in this case. I would prefer to compare the corporation to a trustee for him – a trustee who was illegally created by him to allow him to do what the articles prohibit. It is obvious that the other members of the company have virtually no interest in it and that their names were used only by Mr. Aron Salomon to enable him to incorporate a company and to use their name to protect himself from liability. This view of the case is entirely consistent with In re George Newman & Co.[4] In a strict legal sense, the transaction may have to be regarded as an activity of the company; But when we asked a jury, who was it? they would say Aron Solomons, and they would be right if they thought the advantageous interest in the business belonged to him.